Sales growth swells dealer profits, but requires heavy capital spending, too

If the dealer makes money, we make money. If the dealer is happy, we are happy.

That mantra has been at the heart of Toyota's retail philosophy since it started business in the United States 50 years ago. It's the main reason Toyota's dealer body has stayed relatively small for so long.

Don't expect that to change.

Toyota has seen tremendous sales growth in the past decade, outpacing the ability of many dealers to keep up. Instead of adding points, Toyota is asking its dealers to expand.

It's a big investment, but Toyota's track record shows it will bring a solid return.

Toyota's California dealers already sell an average of 3,500 new vehicles a year per store. Given Toyota's business model, adding a not-unlikely 1 million units and few dealers, the per-dealer sales count will grow to 5,000 units annually. That compares with 1,821 annual sales per store currently for the entire U.S. dealer body.

But the Heartland may see even greater volume surges as Toyota increases its emphasis in heretofore underserved markets.

Those kinds of growth figures have Toyota scrambling to find new ways to retail vehicles, says Bob Carter, Toyota Division general manager.

"Our biggest challenge is elevating the customer experience," Carter says. "By the middle of next decade, boomers no longer are the dominant consumer force; it's their kids. Plus, America is becoming more diverse in terms of Hispanic consumers. So the customer is changing, and we have to change."

Some dealers have grown to the limits of their real estate, which might mean relocation. They might move their service operation to a satellite location in a less-expensive neighborhood. Others are converting areas of their service bays into assembly-line quick-lube and tuneup shops to make the process quicker. No matter what, it's pricey.

EXPAND OR SELL?

But many dealers have been with Toyota for decades and have been through several store remodelings. The dealers have grown exponentially along with Toyota, growth that could trigger estate-tax hassles when the owners try to pass the investment to their children.

And if aging owners don't have children, they may be even more hesitant to make a big investment to renovate again, prompting many to sell to a larger entity.

"Renovation is a major exercise and a distraction for the dealer," says Al Cabito, group vice president of sales administration for Toyota Motor Sales U.S.A. "If the dealer is not going to reap the benefits personally, and without a succession plan, then, yeah, he's going to sell."

At the same time, Toyota doesn't want to have too many franchises controlled by a small group of megadealers.

"We are seeing more of the individual entrepreneurs doing what the factory used to do in terms of dealer development," Cabito says. "They bring a guy in at 30 percent ownership, and when the entrepreneur retires, they give the guy the opportunity to buy the store."

Toyota also is counting on dealers such as Steve Landers Sr., who has built a multifranchise empire in Arkansas and Alabama that includes two ground-up remodelings of Toyota stores in Little Rock and Fayetteville. His two sons, Steve Jr. and Scott, handle the daily operations of the Little Rock store, while the elder Landers seeks new investment opportunities.

Landers, whose partner is former Clinton administration chief of staff Mack McLarty, is seeking dealer principals nearing retirement — and without a succession or inheritance plan — to buy their holdings.

"A guy who's 54 or 64 — who doesn't have sons in the business like mine — doesn't want to take the plunge into a big cost to renovate. We're out hunting for guys like that," Landers says. "We'll make that investment and build the building."

Landers' two Toyota stores should make Cabito smile. After spending about $25 million to rebuild his Little Rock store, Landers' new-vehicle sales have soared from 125 a month to 380. In Fayetteville, a smaller renovation of an operation bought from another dealer resulted in sales jumping from 40 new vehicles a month to 110 within its first six months of operation, Landers says.

While initially a modest venture, Landers and McLarty recently joined with Black Entertainment Television founder and billionaire Robert Johnson to procure 10 or more stores in the near future.

COUCHES AND FIREPLACES

But it's more than building a new showroom, Cabito says. An old franchise may mean an old way of doing business. A new store gives dealers a clean sheet.

For instance, the new North Point Toyota showroom in Boerne, Texas, outside San Antonio, has a comfy service waiting area with a huge fireplace, plush couches, hardwood furniture and flat-screen TVs. It looks and feels more like a living room than a car dealership — a real change from the stereotypical sterile coffee lounge at many dealerships.

If Toyota is to add new franchise points, they likely will be suburban satellites of existing large dealerships in major metropolitan areas.

John McGovern, who worked in service, finance and dealer relations for more than 30 years at Toyota, notes that the automaker's early executive staff came from Detroit and learned from its failures there.

"We knew overdealering could be a problem," recalls McGovern, 67. "Today, our dealers know the direction we are going, so we don't have to harangue them to grow.

"Dave Wilson's $75 million Lexus store (in Newport Beach, Calif.) is actually a companion store to his main dealership in Tustin. But what matters most is that customers don't know it's a companion store."

Jim Lentz, Toyota executive vice president, says dealership evolution isn't just about bricks and mortar. "It's not just square footage. It's how many associates do you need, how do your processes need to change," Lentz says.

He says dealers, facilities and employees need to adapt to the Internet age: "People may want to buy and sell cars 24/7 — not because the dealer wants to but because that's what the customer wants."

You can reach Mark Rechtin at mrechtin@crain.com. -- Follow Mark on